| Annuities are normally associated with retirement | | | | retirement planning, it is therefore critical to establish |
| because they can provide a guaranteed lifetime | | | | a balance between your income stream and |
| income. However, annuities are only part of the | | | | retirement fund. |
| solution to longevity risk (the risk of outliving your | | | | When planning for retirement, more information |
| savings). When drafting a retirement plan, it is | | | | makes your retirement plan much more robust and |
| important to know and understand the role of | | | | accurate. Knowing the annuitization rate (or payout |
| annuities. | | | | rate) of your insurer is helpful when selecting an |
| The feature of annuities that significantly affects | | | | annuity or calculating the size of annuity fund |
| their use in retirement planning is estate liquidation. | | | | necessary to provide your retirement income goal. |
| Annuities liquidate the accumulated annuity fund once | | | | You can also use annuities to boost your |
| it enters the payout phase. For example, suppose | | | | accumulated retirement fund (as opposed to |
| you need $1,000,000 and an annual income stream of | | | | retirement income). Not all annuities are designed |
| $80,000.00 to live a comfortable retirement. If you | | | | strictly for guaranteed lifetime income. Certain |
| use an annuity solely for that income stream, you | | | | annuities provide withdrawal or cancellation options |
| may need to accumulate 1.8 million by the time you | | | | that enable you to receive the full cash value under |
| retire ($800,000.00 liquidated at an annuitization rate | | | | certain circumstances. |
| of 10%). | | | | To recap, use the following tips once you use |
| Given that annuities are estate-liquidating, it is | | | | annuities as part of your retirement plan:i) Do not |
| advisable to use them as one source of retirement | | | | wholly rely on annuities for retirement income.ii) |
| income- not as a single source. Therefore, you need | | | | Remember that annuities are income options in your |
| to determine how much of your retirement income | | | | retirement portfolio. Use them in conjunction with |
| you will derive from annuity payments. Annuities are | | | | growth options, especially when you have a long |
| only income options within your retirement portfolio. | | | | investment horizon.iii) Consider the impact of annuities |
| No matter how safe or advantageous an annuity | | | | (particularly immediate annuities) on your estate.iv) |
| may seem, you should not invest everything into an | | | | Understand that you need to have a very high cash |
| income option- particularly one that tips the scale in | | | | value in an annuity to get an acceptable payout at |
| favour of an insurer. | | | | retirement.v) Include an annuity's annuitization rate as |
| Immediate annuities are a classic example of the | | | | part of your annuity purchase decision. |
| estate-liquidating nature of annuities. For example, | | | | There is an old adage that too much of one thing is |
| you have a lump sum to invest at retirement (maybe | | | | good for nothing. When using annuities as part of |
| $200,000.00). The insurer will effectively purchase | | | | your retirement plan, that adage is particularly |
| your lump sum in exchange for a guaranteed lifetime | | | | relevant. An annuity is merely a financial tool. How |
| payment that equates to an 8-10% return on your | | | | good it is ultimately depends on how it is used. |
| money. When you consider how to use annuities in | | | | |